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Commercial Regulatory Issues

Hong Kong Commission Recommends Outcome-Related Fee Structures

A long-awaited report from the Law Reform Commission of Hong Kong was published. On the topic of outcome-related fee structures in arbitration, it recommends that prohibitions on ORFSs be lifted. By allowing outcome-related fee structures, Hong Kong will align more closely with other global arbitration destinations. Burford Capital explains the specific recommendations of the commission, which reflect the growing acceptance of ORFSs around the globe. At present, lawyers cannot legally enter ORFSs for arbitration or litigation proceedings. According to the commission, there are restrictions on three specific types of arrangements that should be lifted:
  • CFAs. Conditional fee arrangements involve a lawyer and client agreeing on a success fee when a case ends in an outcome favorable to the client.
  • DBAs. Damages-based agreements occur when a lawyer only receives payment when they obtain a financial benefit for their client. That payment is typically calculated as a percentage of a settlement or award.
  • Hybrid DBAs. A hybrid damages-based agreement involves paying a fee (often discounted) for legal services, in addition to a percentage of any award or settlement.
It’s largely agreed that allowing for more fee structure options is beneficial for clients and legal firms.
Commercial

Litigation Finance as a Creative Bankruptcy Solution

Since the start of 2020, the pandemic has wrought havoc on the business world. According to S&P, 630 public companies have gone bankrupt, an increase from 578 in 2019.   Above the Law explains that the ravages of COVID happened simultaneously as Litigation Finance began mainstreaming. While traditional investments lagged, and financial turmoil ensued, third-party legal funding became the solution to an economy that was essentially stopped in its tracks. How does Litigation Finance help? When we talk about financing litigation, we aren’t just talking about class action lawsuits or conflicts between two distinct parties. In a bankruptcy situation, legal funding can enable recoveries, preserve assets, enforce judgments, and assure that ongoing claims are processed. In fact, there are many common situations where Litigation Finance can make a profound difference:
  • Increase Cash Reserves. For companies in distress, monetizing existing legal assets can increase cash reserves, offering a financial cushion.
  • DIP Financing. Sometimes, a company or estate’s most valuable assets are in the form of legal claims. In these instances, courts have been more open to approving funding agreements—finding that they best serve both debtors and creditors.
  • Financing Creditors. An estate may provide funding to creditors to pursue litigation. In some cases, funding agreements can also resolve claims between funders and debtors.
  • Sale of Legal Assets. An estate may sell off its stake in existing litigation like any other asset in the liquidation process. This may happen to accelerate impending recoveries, offset expenses, or reduce risk.
  • Liquidation or Litigation Trusts. Litigation trusts are sometimes used by unsecured creditors who may not benefit from bankruptcy proceedings. Such trusts allow for the confirmation of a plan to reorganize. Trusts may get seed funding or may rely on contingency agreements.
As more bankruptcy professionals become aware of the benefits of legal funding, its use and potential for adaptability will only increase.
Commercial

Questions You Should Be Asking ATE Insurers

The importance of finding the right funding partner when you need one the most is critical. Risk-sharing can be more important than ever in the current financial climate. With major legal funders exiting the market, some lawyers are getting nervous. Not all of the funding solutions presented seem palatable. Legal Futures details that alternatives to legal funding include potentially costly and unreliable deferments, and on-balance-sheet lending, which can be an increasingly large financial burden over time. Matthew Best, senior underwriter for Temple Legal Protection, recommends a CCA agreement option. The Consumer Credit Act is often thought of as adding complications to client/lawyer agreements. But many who work with law firms in the UK, find the process to be straightforward and fairly simple. Best suggests asking about five specific issues when speaking to an ATE insurance provider:
  • Will I have to obtain approval for disbursements?
  • Will approval be needed after a specific amount?
  • Will I be tied to a particular service provider?
  • Must I obtain approval to issue proceedings?
  • Is approval needed to reject a Part 36 offer?
Asking the right questions up front can help avoid stress and major headaches later on.
Commercial People Moves

LCM Ousts Executive Vice-Chair for Alleged Financial Misconduct

Nick Rowles-Davies, the former executive vice-chairman of LCM, has been dismissed by the company on the grounds of ‘gross misconduct.’ The alleged misconduct occurred in relation to expense claims. Global Legal Post details that CFO Mary Gangemi announced the removal in a statement to the London Stock Exchange. She stated that some expense claims were made that were not in accordance with LCM’s Global Expense Guidelines and Policy. Rowles-Davies has been removed from his board of directors position, effective immediately. Rowles-Davies is a highly respected member of the litigation funding community. His previous experience includes co-founder of Vannin Capital and managing director of Burford Capital. Currently, Rowles Davies serves as the chair of the Commercial Litigation Association, and on the board of CourtCorrect.
Commercial Special Features

Key Takeaways from LFJ’s Special Digital Event: Insights from New Entrants into Litigation Funding

On Wednesday, December 15th, Litigation Finance Journal hosted a special digital event featuring insights from new entrants into litigation funding. A panel featuring Charles Schmerler (CS), Senior Managing Director of Pretium Partners, Zachary Krug (ZK), Director of Signal Capital Partners, and Mark Wells (MW), Co-Founder of Almatura, discussed deal sourcing fundraising and hiring from a new entrant's perspective.  Below are some key takeaways from the panel discussion, which was moderated by Ed Truant, founder of Slingshot Capital: Broadly speaking, how do you view the current investor landscape for fundraising in the jurisdiction in which you’re involved? Also, what sort of goals do LPs have when approaching the litigation finance space, and how should new entrants into the space prepare when speaking to prospective investors? MW: Our first fundraise really was a slow burn between 2008 – 2010 when we closed the first fund. You’ll remember when we arrived in the market then, pretty much everyone was a first time manager. There was very little in the way of seasoned product, or to say nothing of the type fund 2 fund 3 type of opportunities. So the investors who were attracted in those days were the pioneering investors and they really had no choice but to commit themselves to first time managers. I think if we fast forward to 2021, it’s a much more mixed environment. There’s a lot more players. My experience is mainly on the European side, but I understand this is also true on the west side. And a number of the players have now matured and are on fund 3, fund 4, fund 5, so investors are presented with a more complete offering ranging from first time managers all the way through to repeat managers. ZK: In some respects, I think the high returns that are uncorrelated to the market remains, and is even a stronger factor in terms of investor appetite, particularly when you look at a landscape where many asset classes are at historically high valuations and it’s difficult to achieve the kind of multiple style returns that you can potentially achieve in litigation funding. So I think that attraction remains there and is quite strong. I think the difficulty for anyone who’s trying to raise money, there’s certainly a lot of money out there, and interest—but the difficulty is, if you’re a new entrant without a track record, you may be an excellent litigator with a long track record of trial victories, but I think without a track record of successful realizations, it can be difficult. Given the asset class and how it performs, it takes a while to develop a track record that’s worth anything because of the long tail risk in these assets. CS: My advice at first was ‘don’t try to raise a lot of money at the beginning of a global pandemic.’ But once you get past that, I think these are key points. Mark touched on something important in that there’s been a significant change in the way investors are able to approach the asset class from the way it was ten years ago. There’s much more data available right now. It’s not a mature industry yet, but there is empirical data out there. So investors are able to diligence this very carefully and they have a number of choices, there are a lot of players as Mark and Zach said. So I think anyone who is looking to raise capital has to be extremely well prepared. Let’s turn our attention toward deal sourcing. Where are you currently originating deals from, and to the extent that you’re willing and able to respond—what methods have you tried and what have yielded the best and worst results? MW: I think we’d say probably four channels of deal flow, the most important deals are from lawyers, and then the other sources would be claimants coming to us direct typically via advertising, LinkedIn, Google, media mentions, stuff like that. And then brokers and intermediaries; both specialist brokers and some of the ad hoc intermediaries. ZK: Mark hit on the key channels from my perspective. I do think it remains very much a relationship driven business, and in terms of what works and what doesn’t work. There is, I think in terms of the lawyers and even the brokers and intermediaries, and I suppose with the funders as well, an aspect where there’s a fair amount of relationship building, business development, what have you, that’s important to maintain those relationships. Let’s shift into a different topic: Hiring. How do you think about organizational design for your firms in terms of a combination of finance, legal, quants type of expertise. Mark, how do you tackle that, historically? MW: Yeah, that’s interesting how you list the financing and the legal and quantitative skills. I think I’d add one more characteristic which can really cut across all those disciplines—and that’s factual curiosity and factual inspection. In our experience over the years, when we look back and look very long and hard about why we lose cases., often it’s singular one-off factors. Something that we get a few times is that we lost the case because the facts that were eventually found deviated from what we’d assume when we were underwriting the case. I think really probing the facts and thinking about what can fill in any blanks in the claimant’s narrative is a really important part of the picture that needs to apply to everyone involved in underwriting the cases. ZK: It’s an interesting question, one that I’m grappling with as we speak, as a relatively new strategy within what is otherwise a very quantitative and numbers-driven organization. My experience is that most litigation funders are staffed by ex-litigators or have many lawyers on staff. They tend to bring that litigation mindset with them, which obviously is important from an underwriting and diligence perspective. But often when you put a bunch of litigators into a room to discuss a case, we can be very good at identifying the risks of what could go wrong, but less good at being creative about how to structure for those risks or to price for those risks, or be willing to take those risks. So my sense in terms of organization and hiring is—it’ll be more important to find folks who are creative about deal structuring and pricing more than simply smart lawyers. It’s more important to have that commercial acumen. Charles, can you comment about what the market for talent is like at the moment and what’s the general professional background that you’re seeing from some of your hires? CS: This feeds off the discussion you were just having with Mark and Zach. The market is good, there is always opportunity to find smart capable lawyers. We have a lot of analysts and quantitative people at the firm already. So we are less in need of hiring those. But I think you already touched on what is the ongoing debate—which is, where should you focus your energies? Should it be on the analytical side, the financial analytical side, or the legal side? We find that you can hire—but the question is: What’s the best way to go about hiring? So for us, we are looking more for people who are not just creative in structuring, but who understand how to recognize value. And that can mean different things in different contexts. For example, we have a particularly strong patent team. Between our two senior-most people, only one is a lawyer. Both have extensive experience monetizing patents over decades, and they understand how to assess the value of a portfolio in ways that most other people cannot.
Commercial Regulatory Issues

The Debate Over TPF Costs

Traditionally, English courts are reluctant to interfere with decisions relating to arbitration proceedings. Arbitrators are given broad discretion to manage cases as they see fit. Courts therefore seldom get involved unless the conduct of an arbitration is so egregious that the situation demands an intervention.  JD Supra explains that the case of Tenke Fungurume SA v Katanga Contracting Services SAS, was just such a situation. It revolved around a mining operation in the Republic of Congo. At one point, a request to adjourn the arbitration to allow for an inspection of facilities was denied. Later, an adjournment was requested due to illness. Again, it was denied. When this was challenged, Justice Moulder ruled that the arbitrator’s decision was reasonable. When costs were submitted, Katanga revealed the existence of a third-party legal funding agreement from a funder controlled by a Katanga shareholder. Katanga was not cross-examined about the details of the agreement, and awarded over $1 million in costs relating to the funding agreement. Tenke labelled the disallowing of cross-examination a procedural error. Judges examined both the type of funding and the amount—which was determined to be reasonable. It was also probably necessary, as Katanga was unlikely to have obtained funding from another source. Still, Tenke challenged the award for costs based on the idea that it was unforeseen that the costs would include fees to litigation funders. Yet Section 61 of the Arbitration Act does allow for awards allocating “costs of arbitration” including “legal or other costs.” Certainly that would apply to funders. Justice Moulder dismissed Tenke’s challenge, determining that the tribunal did not exceed its powers under Section 68. It’s been noted that this decision illustrates that the threshold to challenge an award under Section 68 is a high one. It’s also noteworthy that Justice Moulder declined to say whether TPF costs should be recoverable expenses as a matter of law.
Commercial

The Burford Quarterly (Q4-21)

Burford has released its Q4 2021 report, which contains exciting insights into the evolution of the legal finance marketplace. Two new products adorn the LF space: Affirmative recoveries and litigation insurance policies. These new sectors are dominated by the same large insurance firms that have offered complimentary insurance and liability products over the last decade.   Burford’s research explains that the new LF-focused features cover the top tier of the industry, representing 10-20% of overall value. Between judgment preservation and affirmative recovery, policy holders are secure with features that represent similar characteristics of traditional insurance. The holder pays a regular premium (monthly, quarterly) to secure coverage. What is keenly interesting is that many policyholders have backdoor participation clauses if a claim were to be executed and ultimately prove successful.     The bundling of the LF product portfolio extends the reach of the emerging marketplace, allowing firms to “goose” (to increase the activity, speed, power, intensity, or amount of) cash value of a claim; a thrilling concept in reality. Download the Buford Quarterly for in-depth analysis of how the LF market is ushering in insurance and asset recovery as avantgarde industry supplements.
Commercial Legal Innovation

Liti Capital to Attend Metaverse in Decentraland Convention

The Global Family Office will host Swiss litigation funding cryptocurrency and blockchain trailblazer, Liti Capital, at the immersive Metaverse in Decentraland’s Crypto Convention Centre.   Liti Capital reports that the crypto-funder is currently a pioneer in the emerging LF token and blockchain technology ecosystem. With such innovation, more investment is pouring into the rapidly-appreciating LF asset marketplace. Benefits include the support of collapsing legacy systems and processes, transformation of access and increase of appeal to sophisticated investor audiences.  Metaverse Decentraland is Europe's prime exploration of future technologies staged to disrupt the future of humanity. Liti Capital scored strategic investment from GDA Capital to spawn user growth, and help lead innovation research across the global LF marketplace.   The first Metaverse in Decentraland, held in 2020, attracted European private wealth executives who look to the Global Family Office for other networking events such as the NFT Summit, the Asia Disruptive Summit and Europe’s Disruptive Investment Summit.
Commercial Regulatory Issues

Are Group Costs Orders Becoming the New Norm?

A recent Victorian Supreme Court decision represents the first Australian ruling for an application seeking a group costs order. The case, Fox v Westpac Banking Corporation, Crawford v Australia, and New Zealand Banking Group Limited, relied on the provision of “the Act” which permits solicitors to be paid with a percentage of a court-ordered settlement or award. Lexology explains that the group costs order application was adjourned, rather than dismissed. This means the plaintiffs could reapply at a later time. Plaintiffs sought group costs plus 25% of an award or settlement be paid to the plaintiffs' legal team. Concerns over ‘flex commission’ arrangements arose in the case with regard to consumers purchasing cars. Because of this, plaintiffs alleged that car dealers had the power to set their own interest rates. Plaintiffs argued that these undisclosed arrangements (there was no legal requirement for disclosure) encouraged dealers to set higher interest rates than those of traditional bank loans. The Court ultimately determined that there are multiple factors to consider when deciding the necessity of a group costs order. In this instance, the plaintiffs did not establish that a group costs order was an improvement over the funding agreement already in place. The best interests of the group members is the standard by which the courts determine group costs orders. This case punctuates the importance of plaintiffs taking the time to closely vet funding agreements and assess whether class members would be better off with a group costs order. The issue of group costs orders isn’t going away. Relevant legislation is almost certainly on the horizon and will present new challenges to plaintiffs and the funders that support them.